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103 Cards in this Set

A corporation formed in accordance with all applicable laws is a de jure corporation and owners generally will not be held personally liable for the corporations obligations.

MAKING THE DE JURE CORPORATION OPERATIVE

After the articles are filed, an organizational meeting must be held for the purpose of:
1. adopting bylaws,
2. electing officers, and
3. transacting other business.

FORMATION OF A DE JURE CORPORATION

To form a de jure corporation the incorporators must file

articles of incorporation and

a certificate of disclosure
with

the corporate commission and

pay whatever fees the state directs.

INCORPORATORS

The persons who undertake to form a corporation.

An incorporator is simply the person who signs the articles of incorporation.

Under the Arizona Business Corporation Act, only one is necessary.

Another corporation may serve as an incorporator.

ARTICLES OF INCORPORATION

The Articles of Incorporation are a contract between the corporation and its shareholders and the corporation and the state.

It must contain

(1) the corporate name and address of the corporation's business;

(2) the name and address of each incorporator;

(3) the name and address of each initial director;

(4) and the name and address each statutory agent.

Also, a statement of purpose is required.

A statement of duration may be required if perpetual existence is not desired.

DE FACTO CORPORATION

A de facto corporation has all the rights and powers of a de jure corporation but

remains subject to a direct attack by the state.

FORMATION OF A DE FACTO CORPORATION

There must be a corporate law under which the organization could have legally been incorporated;

there must be colorable compliance or a good faith attempt to comply with the incorporation laws;

and the corporation must act like a corporation.

CORPORATION BY ESTOPPEL

A business may be treated as a corporation if persons treated the entity as such.

Those persons will be estopped from avoiding liability.

The doctrine applies to both the purported corporation and outsiders dealing with the purported corporation.

PIERCING THE CORPORATE VEIL

A person or entity can hold the shareholders, officers and directors individually liable where

(1) the corporate formalities were ignored;

(2) the corporation is under capitalized at the outset; and

(3) to prevent fraud.

ALTER EGO THEORY

If the shareholders treat the assets of the corporation as their own, use corporate funds to pay private debts, fail to keep separate corporate books, and fail to observe corporate formalities, courts often find the entity as an alter ego.

If a corporation is the alter ego, agent, or instrumentality of a sole proprietor or another corporation, its separate entity may be disregarded.

BYLAWS

Adoption of bylaws is not a condition precedent to formation of a corporation.

If bylaws conflict with the articles, the articles control.

PROMOTER

A promoter is the person who acts on behalf of the corporation not yet formed.

A promoter remains liable until their has been a novation unless the contract clearly says otherwise.

NOVATION

A novation requires that, the promoter, the corporation and the third party to a contract all agree that the corporation will replace the promoter.

WHEN IS A CORPORATION LIABLE FOR PRE-INCORPORATION CONTRACTS

A corporation is not liable for pre-incorporation contracts until it adopts the contract either expressly or impliedly.

SECRET PROFIT RULE

A promoter has a fiduciary duty to other promoters and the corporate entity.

A promoter is prohibited from secretly pursuing personal gain at the expense of their fellow promoters or the corporation.

Promoter liability will arise for breach of fiduciary duty, fraud or misrepresentation, or for obtaining unpaid stock.

FOREIGN CORPORATIONS

A state has unlimited power to exclude or regulate foreign corporations other than those engaged in interstate commerce, since corporations are not citizens within the meaning of the Privileges and Immunities Clause. Usually a foreign company may not transact business in Arizona until it has filed an application for authority to transact business.

DEBT SECURITY

A security representing a loan given by an investor to an issuer. In return for the loan, the issuer promises to pay interest and to repay the debt on a specified date.

EQUITY SECURITY

An equity security is a security representing an investment in the corporation. In return the holder becomes a part owner of the business.

ISSUANCE

Issuance of stock occurs when a corporation sells or trades its own stock. It is a way in which a corporation can raise capital.

SUBSCRIPTIONS

A subscription is a written offer to purchase shares from the corporation. Subscriptions can be made to existing corporations and corporations to be formed. A preincorporation subscription is irrevocable for six months unless otherwise provided. A subscription does not become a contract until it is accepted by the corporation.

CONSIDERATION

The ABCA allows stock to be issued in exchange for any tangible or intangible property or benefit to the corporation. It excludes future services and promissory notes.

PAR VALUE

Par Value has been eliminated in Arizona. The ABCA allows corporate directors to issue stock for whatever consideration they deem adequate.

PREEMPTIVE RIGHTS

Preemptive rights are the rights of existing shareholders to maintain their percentage of ownership by buying stock whenever there is a new issuance of stock. To do so the shareholder must purchase enough stock to maintain percentage.

STATUTORY REQUIREMENTS - DIRECTORS

Unless provided for otherwise, the board of directors has the general reponsibility for the mangement of the business and the affairs of the corporation.

DUTIES AND RESPONSIBILITIES OF DIRECTORS

Directors have a fiduciary duty to the corporation. This includes the duty of due care, duty of loayalty, and the duty to protect the interests of other intracorporate parties.

DIRECTOR'S DUTY OF CARE

A director must act in good faith, with the reasonable belief that her actions are in the corporation's best interest, and with the care that a prudent person in like position would use.

SELF DEALING

Any deal between the corporation and one of its directors (or a directors relative) is prohibited unless the transaction was approved by a majority of directors and shareholders entitled without a conflicting interest and it is judged fair to the corporation.

DIRECTOR'S DUTY OF LOYALTY

Directors and officers must act in good faith in the best interests of the corporation without regard to personal gain. Common breachs of this duty are:
1) Insider Trading
2) Self-Dealing
3) Liability for passive participants
4) Other Duties

COMPETING VENTURES AND CONFLICTING INTERESTS

In Arizona, a director cannot compete directly with the corporation unless the transaction was approved by a majority of directors and shareholders entitled without a conflicting interest and it is judged fair to the corporation.

CORPORATE OPPORTUNITY DOCTRINE

Directors are prohibited from diverting a business opportunity from their corporation to themselves without first giving their corporation an opportunity to act.

COMMON LAW INSIDER TRADING

Federal statutes control most insider trading litigation. A director has a duty to disclose to the person with whom the director is negotiating any special circumstances that may have a significant impact on the value of the stock or on negotitations.

AMENDMENTS MADE WITHOUT SHAREHOLDER APPROVAL

Unless the articles provide otherwise, a corporation's board of directors may amend the articles without shareholder action to:
1. Extend the duration of the corporation;
2. Delete the names and addresses of the initial directors or initial statutory agent;
4. Change the authroized number of shares, as long as there is only one class of shares outstanding;
5. Change the corporate name by substituting a differnet word or abbreviation

DIRECTOR LIABILITY

A director is presumed to have concurred with board action unless she objects at the outset to the transaction or unless her dissent or abstention is noted in writing in the corporate records.

OFFICERS STANDARDS OF CONDUCT

If an officer has discretionary authority with respect to any duties, an officer's duties shall be discharged under that authority:
1. In good faith.
2. With the care an ordinarily prudent person in a like position would exercise under similar circumstances.
3. In a manner the officer reasonably believes to be in the best interests of the corporation.

SARBANES-OXLEY ACT

Only effects those companies whose shares are traded on a national securities exchange. It prohibits loans to excutives in publicly-traded companies.

NO INDEMNIFICATION OF DIRECTORS AND OFFICERS

A personsued in her capacity as director or officer can not seek indemnification if she was held liable to the corporation or held liable on the basis of improper benefit.

SHAREHOLDER DIRECT CONTROL

Generally shareholders have no right to day-to-day control over the corporation. ABCA does allow for some departure from this rule. They may by agreement restrict the discretion or powers of the board, govern the authorization or making of distributions, establish who shall be directors, govern the exercise of voting power, etc.

SHAREHOLDER INDIRECT CONTROL

Shareholders may elect and remove directors and modify bylaws. Shareholders must approve all fundamental corporate changes.

SHAREHOLDER LIABILITY

Generally a shareholder is not liable for the acts or debts of the corporation unless the court pierces the corporate veil to avoid fraud or infairness.

UNDERCAPITALIZATION

A situation in which a company does not have enough unencumbered capitalreasonably adequate for its prospective liabilities. If a company is undercapitalized at incorporation shareholders may be held personally liable.

SHAREHOLDER MANAGEMENT STATUTORY CLOSE CORPORATION

If the corporation is not listed on a national securities exchange , or its shares are not publicly traded, shareholders can enter an agreement restricting the power of the board and vesting it in shareholders or others.

PROFESSIONAL CORPORATION

Professionals may incorporate as a professional corporation. The articles must provide that it is a professional corporation and that its purpose is to render the specified professional services.

SHAREHOLDER DERIVATIVE SUITS

When a shareholder sues to enforce a corporate claim, not her personal claim. A deriviative suit may be filed against the corporation's directors or a third party if the board is unwilling to do so.

1. Double taxation
2. Formalities and expenses of forming and running a corporation

SHAREHOLDER VOTING

Unless otherwise provided for in the articles, each outstanding share, regardless of class, is entitled to one vote on a matter to be voted on at a shareholder's meeting.

STOCK TRANSFER RESTRICTIONS

Shareholders in a corporation may freely transfer their ownership by selling her shares unless some reasonable stock transfer restriction is in place.

Right of first refusal is almost always reasonable.

SHAREHOLDER RIGHTS TO INSPECT AND COPY BOOKS

Any shareholder for at least six months or who will be the holder of at least five per cent of all of the outstanding shares of a corporation is entitled to inspect and copy any of the records of the corporation during regular business hours at the corporation's principal office, if the shareholder gives the corporation written notice of its demand as provided at least five business days before the date on which it wishes to inspect and copy.

DISTRIBUTIONS

Distributions are payments to shareholders declared in the board's discretion, in its business judgment.

They can be in the form of:
1. dividends; or
2. repurchase of shares; or
3. redemption of shares (forced sale to corporation at price set in articles)

FUNDAMENTAL CORPORATE CHANGE AND DISSENTING SHAREHOLDER RIGHTS

A shareholder dissenting to a fundamental corporate change has a right of appraisal. It is the right to force the corporation to buy her shares at fair value.

Some emendments to the articles, a merger, disposition of substantially all assets not in the rgular course of business and disposition of shares in a share exchange will trigger this right.

WHEN CAN A SHAREHOLDER BE HELD LIABLE?

1. for unpaid stock;
2. under a pieced corporate veil; and
3. in the absence of a de facto corporation when the shareholder knew that there was no incorporation

MERGERS

ABCA provides that the basic procedure for a fundamental change be followed. Generally, the board of directors and the shareholders must approve. No shareholder approval is required in a short form merger. Remember Right of Appraisal.

DISPOSITION OF ALL OR SUBSTANTIALLY ALL ASSETS

A sale, lease, exchange, or other disposition of all or substantially all of the corporation's property outside the usual and regualar course of business is a fundamental corporate change and must follow the same procedures.

EFFECT OF DISSOLUTION

A corporation dissolved continues its corporate existence, but is not allowed to carry on any business except that which is appropriate to wind up and liquidate its affairs.

VOLUNTARY DISSOLUTION OR DISSOLUTION BY CORPORATE ACT

A voluntary dissolution is the termination of the corporate existence without judicial proceedings. It must be based on both the board of directors and shareholders approval.

CORPORATIONS

A corporation is a legal entity distinct from its owners.

CERTIFICATE OF DISCLOSURE

The certificate of disclosure must state whether any officer, director, trustee, incorporator, or person controlling more than 10% of the issued and outstanding common shares has been convicted of a felony or subject to an injunction involving crimes such as consumer or securities fraud.

STATUTORY AGENT

A statutory agent is the corporation's official legal representative and can receive service of process on behalf of the corporation.

REMOVAL OF DIRECTORS

By cause or without cause, unless the articles provide that removal may be only for cause. Shareholders can remove Directors by a Majority of those entitled to vote or by the court based on fraud or gross abuse.

NOTICE OF MEETINGS

Regular board meetings may be held without notice. Special meetings require at least two days notice.

INITIAL MEETING

After incorporation, the board must meet to appoint officers, adopt bylaws and carry on other business.

ULTRA VIRES ACTS

Corporation has powers expressly conferred upon it by either AoI or state statute. Any action outside of these expressed or implied powers is an ultra vires act.

IMPROPER CONSIDERATION FOR STOCK EXCHANGE

Stock exchanged for the following would be considered an improper exchange:
1) Future Services performed.
2) Good Will
3) Promissory Notes

WHAT CAN BE IN BYLAWS?

Anything that is not inconsistent with the articles of incorporation or the law.

WHAT ARE THE CHARACTERISTICS OF A DE FACTO CORPORATION?

"1. Colorable, good faith compliance with incorporation statute.

WHAT IS THE EXCEPTION TO PROTECTION UNDER DE FACTO CORPORATION?

If persons know that there is no incorporation, they are liable.

WHAT IS THE EXCEPTION TO CORPORATION BY ESTOPPEL?

It does not apply to tort victims (on the rationale that a tort victim does not allow himself to be injured in reliance on a business's status as a corporation).

HOW IS A DE FACTO CORPORATION TREATED DIFFERENTLY FROM DE JURE CORPORATIONS?

The state may seek dissolution of a de facto corporation in a quo warranto proceeding.

ARE OFFICERS REQUIRED?

The ABCA does not require a corporation to have any specific officers, but rahter provides that a corporation shall have the officers described in tis by laws or appointed pursuant to the bylaws.

WHAT'S EASIER TO PIERCE THE VEIL -- TORT OR CONTRACT?

Torts becaus contracting parties had a chance to see if the corporation was legitimate.

WHAT DO YOU NEED IF YOU WANT CLASSES OF SHARES?

Has to be prescribed in the Articles of Incorporation.

WHAT IS A STOCK SUBSCRIPTION?

Promise by subscribers to buy stock in the corporation when it's formed. Irrevocable for six months.

WHAT IF A SUBSCRIBER DOES NOT PAY?

He can lose his subscription as well as the amount he's already paid.

IF A PROMOTER IS HELD PERSONALLY LIABLE ON A CONTRACT FOR THE CORPORATION, CAN HE GET REIMBURSED?

Yes, to the extent the corporation benefitted.

HOW DO SHAREHOLDERS EXERCISE POWER?

Usually, just by voting power, election of directors, adoption of bylaws, and approval of fundamental changes.

WHEN MUST SHAREHOLDERS HOLD MEETINGS?

A corporation shall hold a meeting of shareholders annually at a time stated in or fixed in accordance with the bylaws. The court may order an annual meeting to be held if one was not held within the three months after the date specified in the bylaws or fifteen months after its last annual meeting.

WHAT IS THE TIME REQUIREMENT FOR NOTICE OF SHAREHOLDER MEETING?

Not less than 10 or more than 60 days before the meeting. Notice must state place, day, hour and, for special meetings, the purpose.

WHEN CAN DIRECT SHAREHOLDER SUITS BE BROUGHT?

For breach of fiduciary duty owed to the shareholder by an officer or director or any time the corporate entity could have brought suit but didn't.

WHAT IS A DERIVATIVE ACTION?

An assertion of wrongdoing on the part of the directors, by a shareholder, on behalf of the corporation at large. Recovery goes to the corporation.

Shareholder must have been a shareholder at the time of the act or omission complained of, or become a shareholder through transfer by operation of law from one who was a shareholder at the time.

WHAT IS NEEDED BEFORE A DERIVATIVE ACTION CAN COMMENCE?

Shareholder must make a written demand on the corporation to take suitable action, then wait 90 days unless corporation says it's not going to do anything, or irreparable harm can result.

HOW CAN A DERIVATIVE ACTION BE DISMISSED?

If a majority of directors (but at least two) who have no personal interest find in good faith after inquiry that the suit is not in the corporation's best interests. Then, Plaintiff has to argue that dismissal not in corporation's best interests.

IS THERE EVER A RIGHT TO DISTRIBUTION?

Yes, upon dissolution. Otherwise, it's discretionary.

QUORUM FOR DIRECTORS

Quorum is majority unless articles or bylaws state otherwise.

BUSINESS JUDGMENT RULE

Directors who act reasonably and in good faith will generally not be held personally liable.

WHAT IS A DIRECTOR'S DUTIES IF FACED WITH A CONFLICT?

Disclose.

But remember, unless the articles or bylaws say otherwise, directors can set own compensation.

WHEN CAN A CORPORATION INDEMNIFY A DIRECTOR/OFFICER?

When the director acted in good faith; and believed that his condcut was in the best interests of the corporation and was not unlawful.

SHAREHOLDER MEETINGS LOCATION

Annual shareholders' meetings may be held in or out of this state at the place stated in or fixed in accordance with the bylaws. If no place is stated in or fixed in accordance with the bylaws, annual meetings shall be held at the corporation's known place of business.

VOTING TRUSTS

One or more shareholders may create a voting trust, conferring on one or more trustees the right to vote or otherwise act for them, by signing an agreement setting out the provisions of the trust and transferring their shares to the trustee or trustees. The agreement may contain any lawful provision not inconsistent with the purposes of the trust.

VOTING AGREEMENT

Two or more shareholders may provide for the manner in which they will vote their shares by signing an agreement for that purpose.

Unless otherwise provided in the voting agreement, a voting agreement created under this section is specifically enforceable.

AMENDING THE ARTICLES OF INCORPORATION

A corporation may amend its articles of incorporation at any time to add or change a provision that is required or permitted in the articles of incorporation or to delete a provision that is not required in the articles of incorporation.

GENERAL FUNDAMENTAL CHANGE PROCEDURE

1. Resolution adopted by a majority of the board of directors.
2. Notice sent to all shareholders.
3. Approved by a majority of all votes entitled to be cast and by a majority of any voting group entitled to vote as a group
4. Formalized in the articles filed with the Arizona Corporation Commission.

EXCEPTIONS TO DIRECTOR LIABILITY

Absent directors and directors who in good faith rely on corporate officers or employees, professionals, committees to which they are not a member of or financial statements prepared according to RAP are not liable.

OFFICERS AND THEIR AUTHORITY

Officers are agents of the corporation. They can bind the corporation by acts taken within their authority. Authority may be expressly provided in the articles, bylaws, or by resolution or implied by virtue of an actual grant of authority or inherent from the office held.

MANDATORY AND DISCRETIONARY INDEMNIFICATION OF DIRECTORS AND OFFICERS

If the director or officer was the prevailing party on the merits or otherwise she is mandatorily indemnified. So long as she was not held liable, the director or officer may be indemnified at the discretion of the corporation.

SHAREHOLDER RIGHTS

A shareholder has rights conferred by state law, by the bylaws of the corporation and, if one has been adopted, by a shareholder's agreement These include the right to be notified of annual shareholders' meetings, to elect directors and to receive an appropriate share of any dividends.

PROFESSIONAL CORPORATION REQUIREMENTS

1. the name must contain words or abbreviations like "professional corporation" or "professional asociation;"
2. Thre profession can be performed only by duly licensed professionals;
3. Licensed professionals generally must hold at least 51% of the stock;
4. and at least half of the directors and the president must be a licensed professional.

Professionals remain personally liable for malpractice.

STATUTORY CLOSE CORPORATION

Statutory Close Corporations are corporations that have few shareholders and shares and are not publicly traded.

CLOSE CORPORATION (GENERAL DEFINITION)

Any corporation formed under a state's regular corporation statutes where the stock is not traded on an exchange

STATUTORY CLOSE CORPORATION FORMALITIES

They have relaxed formalities that allow the corporation to 1. do away with a board of directors
2. shareholders do not have to hold meetings.
3. shareholders can run the corporation, by way of a shareholder agreement
4. Shareholders can agree to have one vote per person, as in a partnership, as opposed to one vote per share

SHAREHOLDER DUTIES IN A STATUTORY CLOSE COPORATION

Shareholders in a statutory close corporation owe each other a fiduciary duty. This means they must act in good faith.

SHARE EXCHANGE

Only the shareholders of the corporation whose shares will be acquired in a share exchange need approve of the exchange. It is not considered a fundamental corporate change for the acquiring corporation.

DISSOLUTION OF A CORPORATION DOES NOT...

1. Transfer title to the corporation's property.
2. Prevent transfer of its shares or securities
3. Subject its directors or officers to different standards of conduct
4. Change quorum or voting requirements
5. Prevent commencement of a proceeding by or against the corporation
6. Abate or suspend a proceeding pending by or against the corporation or any officers, directors or shareholders
7. Terminate the authority of the statutory agent of the corporation.